News

CME: Live and Feeder Contracts Pressured by Wholesale Beef and Grain Price

15 February 2013

US - The markets are showing a large disparity between cutout and live steer price although Steve Meyer and Len Steiner have said the gap should not be long-term.

Cattle futures were lower on Tuesday as a combination of weak wholesale beef prices and lower grain values pressured both live and feeder contracts, write Steve Meyer and Len Steiner.

Nearby feeder cattle futures declined as much as 155 points as corn futures continued to drift and closed below $7 per bushel. Corn demand continues to be a hot topic and the market, for the moment, is focusing on what it can see, weak export sales and lower ethanol use.

There is plenty of speculation about the pace of feed use but we will not know for sure until the March 1 grain stocks report is issued. Crops in South America have so far avoided any major weather events and this also has been bearish for corn. And then there is the rampant speculation that with grain yields potentially returning to trend (or at least close to trend), corn supplies will balloon next year, requiring significantly lower prices to clear the market.

Wholesale beef prices have taken a tumble in recent days, with the choice beef cutout closing on Tuesday afternoon at 188.00/cwt, down $4.55/cwt or 2.4 per cent from year ago levels. It is fair to say that few (if any) expected the beef cutout to be below year ago levels at this point. Just a month ago, the board was pricing February live cattle at $133/cwt., a price point that would require the cutout to be above $200/cwt.

Even as live cattle has given back about 5 per cent in the last four weeks, the disparity between wholesale and live values remains significant (see chart). At this point, it appears that the market believes the gap is temporary. After all, the snow storm that hit much of the country last weekend caused plenty of disruptions, causing product to back up and forcing packers to cut prices on spot loads to get product moving.

If that theory is correct, then the choice cutout should recover $7-8/cwt in the next couple of weeks. But the downward pressure in the wholesale market did not happen this weekend, it has been the story in the beef complex for the last four weeks, the storms maybe exacerbated what has been a very dismal start to the new year. Most beef primals are currently below year ago levels but two are the more prominent: loins and round cuts.

The loin primal is currently down $13/cwt or 5 per cent from a year ago, accounting for more than half of the decline in the value of the cutout. The business environment for high value beef cuts has been difficult, with the foodservice sector in contraction mode and retail customers frightened by the sight of $15 steaks in the meat case.

Round cuts also have been hit hard. These are largely retail items that normally should help the carcass at this time of year. But again, with retail beef prices at record highs, retailers are struggling to feature less expensive protein.

We also think that the quantity demanded was negatively impacted by the forward pricing last fall and the resulting high cost of beef in the retail case. Retailers plan their features in advance and last fall, the forward pricing of items such as rounds, for instance, was off cattle futures in the mid 130s.

Needless to day, retailers likely curtailed their beef ads and those that booked those loads now have trouble clearing the case when a five pound top round roast has a sticker of $30 or more. Finally there is the issue of beef supplies.

The expectation is for beef supplies this year to be sharply lower than a year ago but so far, that has not happened. Indeed, steer and heifer slaughter is running at about the same level as a year ago and heavier weights are bringing more pounds to market. Unless we figure out a way to shift the entire beef demand curve, prices will be stuck in low gear with these kind of supply levels.